Note: This was part of a 1993 study I did as a consultant at the IMF in Washington in a project on exchange-rates and exports of “South Asian” countries. The IMF is not responsible for its content.

“The Ceylon rupee traded 1:1 with the Indian rupee at the time of Independence and devalued with sterling and the Indian rupee in September 1949 to Rs.4.76 per United States dollar. It was pegged to sterling throughout the Bretton Woods period at that value. Sri Lanka did not respond to the Indian devaluation of 1966 but when sterling devalued in November 1967 from $2.80 to $2.40, the Ceylon rupee was devalued by 20 percent to Rs.5.95 per United States dollar. In May 1968, a dual exchange-rate system was introduced with the official rate of Rs. 5.95 applying to official capital transactions, traditional exports of tea, rubber and copra, and imports of foods, drugs and fertilizers. Other importers and non-traditional exports faced an exchange-rate of Rs. 8.57 per United States dollar, devalued to Rs. 9.23 in June 1969.
Following the end of the Bretton Woods mechanism in August 1971, the Ceylon rupee appreciated because of its peg to sterling. As with India and Pakistan, the link to sterling was soon broken, and in November 1971 the Ceylon rupee was pegged to the dollar, thereby depreciating with the dollar. The peg was at the same official rate of Rs. 5.95 as previously. As with India and Pakistan, it is possible that long-term damage was done to Sri Lanka’s competitiveness relative to other developing countries in the Bretton Woods period by overvalued nominal exchange-rates associated with inward looking trade policies.
When sterling floated in June 1972, Sri Lanka delinked from the dollar and pegged at Rs. 15.60 to sterling, until May 1976 when the rupee was delinked again from sterling and pegged to an undisclosed basket of currencies. In a major reform in November 1977, the multiple exchange-rates were unified and the Sri Lankan rupee was devalued by more than 46 percent to Rs. 16 per United States dollar, which was maintained until the first half of 1980. The rupee depreciated further to Rs. 18.01 per United States dollar by the end of 1980, and to Rs.18.35 by May 1981. Relative to a weighted average of the currencies of Sri Lanka’s major trading partners (including India and Pakistan) the rupee depreciated by 14 percent from November 1977 through July 1980 and a further 10 percent by December 1980. But due to higher Sri Lankan price-level changes, this may have been associated with appreciation of the real exchange-rate.
From August 1983, a formal system was adopted attempting to target the real-exchange rate, by which the rupee would be adjusted periodically depending on domestic price-levels relative to Sri Lanka’s six main trading partners (Britain, the United States, India, Japan, Germany and France). In practice, the Sri Lankan authorities took other factors into account, “most notably exchange-rate movements of the currencies of neighboring as well as competitor countries”. The first half of the 1980s were marked by real exchange-rate appreciation by as much as 30 percent, especially against the currencies of Sri Lanka’s neighbours and competitors including India and Pakistan. In 1985, the rupee depreciated by more than 9 percent in nominal terms and more than 15 percent in real terms, including against India and Pakistan, but this decline did not fully offset the loss of competitiveness in 1981-1984.
Since 1986, the real effective exchange-rate has fluctuated substantially. Between 1986 and mid-1989 it depreciated by over 10 percent, when a large nominal depreciation in September 1989 contributed to further depreciation of the real rate. Subsequently, the real rate appreciated by about 17 percent between late-1989 and early-1991, following which further nominal depreciation contributed to gradual real depreciation through mid-1992.
Technical studies at the IMF laid the groundwork for a floating market-determined exchange-rate for Sri Lanka based on a daily interbank market. Sri Lanka introduced such a system in August 1990, whereby the authorities were to set daily buying and selling rates as intervention points and permit the spot exchange rate to be determined within them. This system began to work effectively with an adequate difference between the intervention points in March 1992. The Sri Lankan rupee, at Rs. 44.6 per United States dollar in December 1991 and Rs. 46 in December 1992, was at Rs. 47.5 in April 1993. The Indian exchange-rate reforms of 1992-1993 have been observed closely by Sri Lankan authorities, and in late March 1993, Sri Lanka removed all remaining barriers to current account convertibility.””

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